ELSS vs PPF – Comparison of ELSS Funds with Public Provident Fund.

ELSS and PPF are both tax-saving investment options and investors often get confused between the two as both provide higher returns. Save taxes up to Rs 1.5 lakh under Section 80C of the Income Tax Act with both the options. Let’s dig deep into these investment options and select the one that suits you the best.

Public Provident Fund (PPF) has always been a popular investment option but Equity Linked Savings Scheme (ELSS) is now catching up due to its higher returns. Along with higher returns, ELSS is also highly volatile due to its equity investment. Whereas PPF being a debt instrument has negligible volatility but comparatively lower returns. Here is the comparative analysis of ELSS vs PPF.

What is Equity Linked Savings Scheme (ELSS)?

ELSS funds help you grow your wealth along with saving your taxes, thus also known as tax saving mutual funds. ELSS Mutual Funds are suitable for individuals looking for long-term investment. These funds primarily invest in equities or equity-related funds. The popularity of ELSS funds has increased in recent times because of its lowest lock-in period, i.e., three years and significantly higher returns.

What Are the Features of ELSS Mutual Funds?

Tax benefits: You can avail tax benefits on investments up to Rs 1.5 lakh in a year under Section 80C. The potential tax benefit is up to Rs 46,800 by investing up to Rs 1.5 lakh in a year in ELSS. The returns on ELSS are taxable. Up to 10% of Long Term Capital Gain (LTCG) tax is applicable if the capital gains exceed Rs 1 lakh per annum in the case of ELSS.

Lock-in period: The lock-in period in the case of ELSS mutual funds is only three years, which makes ELSS funds a more liquid investment option.

High returns: Past data reveals that ELSS funds have generated 11% to 14% returns in a time span of 3 to 5 years. However, ELSS funds are highly volatile and returns are not guaranteed.

Risk factor: ELSS essentially invests in equity and equity related securities across sectors and market capitalisation. Since it is market-linked investment, it is subject to market risks.

SIP investment: Investing in ELSS through the SIP mode is quite flexible, and one can start as low as Rs 500 per month. One can also invest a lump sum amount in ELSS.

What is Public Provident Fund (PPF)?

PPF is a government-backed tax saving scheme. Along with guaranteed returns, it gives you tax benefits under Section 80C. The interest rates are fixed by the government every quarter, which is currently fixed at 7.10%.

What Are The Features Of A PPF?

Tax Benefit:  You can claim a deduction of up to Rs 1.5 lakh under Section 80C. PPF investment comes under the triple exempt category, i.e. the principal amount, interests earned and the returns are all tax-exempt.

Risk factor: PPF is a low-risk investment as it is a government-sponsored, plus the investments are not market-linked.

Lock-in period: PPF deposits have a mandatory lock-in period of 15 years; however, on special grounds, a partial withdrawal is allowed from the 6^th year onwards. You can also avail loan on your PPF Deposit Account from the 3^rd to 6^th financial year of opening your PPF Account.

Fixed Returns: The returns on the PPF are fixed and the interest is fixed on a quarterly basis by the government. For the last five years, the average return has been around 7.1% p.a.

Investment: You can start PPF investment with as little as Rs 500 and a maximum of up to 1.5 lakh in a year. You can deposit a maximum 12 times a year.

Which one to choose, PPF or ELSS?

While both these investment avenues have their own perks, choosing one entirely depends on your risk appetite, investment horizon and the investment amount. If you wish to have a liquid investment, you can choose ELSS, or if you wish to invest for a longer period, you can choose PPF. Also, if you have a low-risk appetite and want fixed returns, you can choose PPF over ELSS.

Whatever investment you choose, a pro-tip is to remain invested for a longer run to mitigate the risks and increase the returns.